Friday, January 22, 2010

Gary Wagner, one of my grad school friends who works up the road at the University of Arkansas-Little Rock, was on Fox Business today. He published a nice paper in the Journal of Law and Economics last year coauthored with a WVU classmate of ours, Tom Garrett, a research economist at the St. Louis Fed. The paper explores whether law enforcement officers really do hand out more tickets when local government revenues are otherwise low.

Using annual data for North Carolina counties from 1990 to 2003, they found that significantly more tickets are issued in the year following a decline in revenue. But here's the really interesting part: the issuance of traffic tickets does not decline in years following revenue increases.

So it indeed appears that tickets are used as a revenue‐generation tool, and not just a tool to increase public safety.

A federal spending surge of more than $20 billion for roads and bridges in President Barack Obama's first stimulus has had no effect on local unemployment rates, raising questions about his argument for billions more to address an "urgent need to accelerate job growth."

An Associated Press analysis of stimulus spending found that it didn't matter if a lot of money was spent on highways or none at all: Local unemployment rates rose and fell regardless. And the stimulus spending only barely helped the beleaguered construction industry, the analysis showed. . . .

. . . AP's analysis, which was reviewed by independent economists at five universities, showed the strategy of pumping transportation money into counties hasn't affected local unemployment rates so far.

"There seems to me to be very little evidence that it's making a difference," said Todd Steen, an economics professor at Hope College in Michigan. . . ."

Monday, January 11, 2010

In an essay titled, "How Democratic Is America?," found in the edited volume, Points of View, historian Howard Zinn writes about

" . . . the powerlessness of the American people to participate in economic decision-making, which affects his [sic] life at every moment. As a consumer, that is, as the person for whom the economy is presumably intended to serve, he has virtually nothing to say about what is produced for him. The corporations make what is profitable; the advertising industry persuades him to buy what corporations produce. He becomes the passive victim of the misallocation of resources, the production of dangerous commodities, the spoiling of his air, water, forests, beaches, and cities."

Sunday, January 10, 2010

Because drinking is bad for you it needs to cost you more. That's the government's latest push in the UK, the Economist reports.

And the pubs don't mind, because it would mean higher alcohol prices at the supermarkets, thereby raising the price of drinking at home:

“LIGHT, golden and refreshing”, proclaims the label on a plastic bottle of cider in Sainsbury’s supermarket. It is also fantastically cheap. Two litres of the sickly yellow tipple costs just £1.21 ($1.94), equivalent to 34p a pint. A stronger variety farther down the aisle gives customers a discount if they buy in bulk. At these prices, shoppers can buy enough booze to exceed the government’s recommended limits for little more than £3 a week.

A growing temperance movement seeks to end this bonanza. On January 8th the parliamentary health committee was due to publish a report demanding that the government introduce a minimum price for alcohol, to render such bargains illegal. Using research from Sheffield University, the committee argued that a floor of 40p for a 10ml unit of alcohol—enough to push the Sainsbury’s cider up to £3.36—would save 1,100 lives per year. A floor of 50p would save 3,000, it said. Medical associations and the police all want to see drink get more expensive too . . . .

(UPDATE: I originally wrote this post while I was finishing some research for a short book I was writing that has recently been published by the Acton Institute. You can see more information about Fair Trade? Its Prospects as a Poverty Solution on the Acton web site.)

I'm currently reading Tim Harford's excellent The Undercover Economist. I particularly enjoyed the second chapter--the one dealing with price discrimination as well as product differentiation.

He begins the chapter with a wonderful anecdote--one that makes you wonder how much of the premium price you might be paying for a cup of Fair Trade coffee is actually getting to the poor coffee grower you hope you are helping. In one case, Mr. Harford estimates that over 90 percent of the Fair Trade premium was mysteriously being "lost" between the retailer and the grower.

Since Mr. Harford writes regularly for the Financial Times, they printed this excerpt:

On a sunny day in London you can purchase a cappuccino and sip away as the capsules on the Eye, the capital’s landmark Ferris wheel, rotate high above you, occasionally passing between you and the sun... one of life’s simple pleasures. Everywhere you look around the Eye you can see vendors with scarce resources, trying to exploit that scarcity. There is only one coffee bar in the immediate area, for instance. There is also a lone souvenir shop doing brisk business. But the most obvious example is the London Eye itself. It towers over the majority of London’s most famous buildings and is the world’s largest observation wheel. The scarcity power is clearly considerable, but it is not unlimited: the Eye may be unique, but it is also optional. People can always choose not to go on it.

Further along the river, the Millennium Dome is similarly unique, “the largest fabric structure in the world”, boasts the local authority. Yet the Dome has proved a commercial disaster because uniqueness alone wasn’t enough to persuade people to pay enough to cover the vast costs of its construction. Business with scarcity power cannot force us to pay unlimited prices for their products, but they can choose from a variety of strategies to make us pay more. It’s time for the Undercover Economist to get to work and find out more.

The only coffee provider beside the London Eye wields plenty of scarcity power over the customer. It’s not innate, but is reflected glory from the amazing setting. As we know, because customers will pay high prices for coffee in attractive locations, the coffee bar’s rent will be high. Their landlords have rented out some of this scarcity value to a coffee bar, just like the owners of Manhattan’s skyscrapers, or railway stations from Waterloo to Shinjuku. Scarcity is for rent - at the right price.

But how should the bar’s managers exploit the scarcity they are renting from the London Eye? They could simply raise the price of a cappuccino from £1.75 to £3. Some people would pay it, but many would not. Alternatively, they could cut prices and sell much more coffee. They could cover wages and ingredients by charging as little as 60p a cup. But unless they were able to increase their sales dozens of times over, they’d not make enough to cover their rent. That’s the dilemma: higher margins per cup, but fewer cups; or lower margins on more cups.

It would be nice to side-step that dilemma, by charging 60p to people who are not willing to pay more and £3 to people who are willing to pay a lot to enjoy the coffee and the view. That way they would have the high margins whenever they could get them, and still sell coffee at a small profit to the skinflints. How to do it, though? Have a price list saying, “Cappuccino, £3, unless you’re only willing to pay 60p”?

It does have a certain something, but I doubt it would catch on with the coffee-buying public of London’s South Bank. However, for years, the previous incumbent coffee bar, Costa Coffee, appeared to have achieved this. Costa, like most other coffee bars these days, offers “Fair Trade” coffee - theirs comes from a leading fair trade brand called Cafedirect. Cafedirect promises to offer good prices to coffee farmers in poor countries. Fair trade coffee associations make a promise to the producer, not the consumer. If you buy fair trade coffee, you are guaranteed that the producer will receive a good price. But there is no guarantee that you will receive a good price. For several years, customers who wished to support third-world farmers - and such customers are apparently not uncommon in London - were charged an extra 10p. They may have believed that the 10p went to the struggling coffee farmer. Almost none of it did.

Cafedirect paid farmers a premium of between 40p and 55p per pound of coffee, and that premium was reflected in the price they charged to Costa. That relatively small premium can nearly double the income of a farmer in Guatemala, where the average income is less that $2,000 a year. But since the typical cappuccino is made with just a quarter-ounce of coffee beans, the premium paid to the farmer should translate into a cost increase of less than a penny a cup.

Of the extra money that Costa charged, more than 90 per cent did not reach the farmer. Cafedirect did not benefit, so unless using the fair trade coffee somehow increased Costa’s costs hugely, the money was being added to profits. The truth is that fair trade coffee wholesalers could pay two, three or sometimes four times the market price for coffee in the developing world without adding anything noticeable to the production cost of a cappuccino. Because coffee beans make up such a small proportion of that cost customers might have concluded that the extra 10p was to cover the cost of the fair trade coffee, but they would have been wrong. A certain Undercover Economist made some inquiries and found that Costa worked out that the whole business gave the wrong impression, and at the end of 2004 began to offer fair trade coffee on request, without a price premium.

But why had it been profitable to charge a higher mark-up on fair trade coffee than on normal coffee? Because fair trade coffee allowed Costa to find customers who were willing to pay a bit more if given a reason to do so. By ordering a fair trade cappuccino, you sent two messages to Costa. The first was: “I think that fair trade coffee is a product that should be supported.” The second was: “I don’t really mind paying a bit extra.” Socially concerned citizens tend to be less careful with their cash in coffee bars, while unconcerned citizens tend to keep their eyes on the price. Perhaps another price list saying, “Cappuccino for the concerned £1.85. Cappuccino for the unconcerned £1.75”?

But he probably wouldn't have been cited with quite the same authority--particularly by mainstream media--if he'd been more upfront about the fact that he's being paid almost $300,000 by the Obama Administration for "special studies and analysis" of the health care bills, as a blogger on Firedoglake revealed last night. . . .

Wednesday, January 6, 2010

Back when I was a boy, I bought a children's book at my town's library book sale called "2010: Living in the Future" by Geoffrey Hoyle. Written in 1972, it had been withdrawn from the library's collection by the mid-80s, when I picked it up. I've somehow managed to hang onto it for 25 years and now, suddenly, here we are: 2010. I'm reproducing this long out-of-print book here to see how we're doing. Are we really living in the future?

James R. Otteson, Joint Professor of Philosophy and Economics at Yeshiva University in New York, and the Charles G. Koch Senior Fellow at The Fund for American Studies in Washington, D.C., has a new commentary in Forbes. Its main thesis is that regardless of the benevolent intentions of government experts, they simply do not have the particular knowledge required to get outcomes right in a nation of over 300 million unique individuals.

. . . experts, however smart, cannot know . . . all the most important things. They don't know your goals, your ambitions or your priorities. They don't know what your values are; they don't know what opportunities are available to you (and what aren't); they don't know your likes and dislikes. Even if they know a lot about human behavior or human welfare in general, they don't know anything about you. They don't know anything about me either, or about anyone else besides themselves and their closest family and friends.

That means that the best they could do is make guesses. But even that overstates their competence. Think of all the information--explicit and implicit--you marshal all day long every day to make the routine decisions you do. What are you going to do for breakfast today? Will you call your friend this afternoon? Will you finally buy your daughter the cellphone she's been asking for? Or larger questions: Should you buy a new house? Look for a new job? Buy or lease a car--and which one?